Fed plays double or quits

Does a big Wall Street firm have a serious liquidity problem? Is that what prompted the Federal Reserve into action yesterday, dragging the world's other leading central banks with it? It wasn't only conspiracy theorists who were touting this idea yesterday.

The market seems to be taking it seriously, as evidenced by the movement in Bear Stearns' share price. Bear is knitted into the world of hedge funds, where the latest bout of pain from the credit squeeze is concentrated. Bear's shares fell 11% on Monday on rumours that it faced financial difficulties. The tales were "totally ridiculous" said the company, but by lunchtime in New York yesterday Bear had lost another 10% of its value and another denial was issued - finally, it stopped the rot.

Bear may turn out to be the innocent victim of a whispering campaign, but its plunging share price testifies to how fear in financial markets has intensified in the past fortnight. Even bonds issued by Freddie Mac and Fannie Mae - US mortgage lenders that carry implicit government backing - have lurched downwards. The worry is that top-quality assets are slowly being dragged into the mess as over-borrowed institutions desperately try to turn their portfolios into cash.

The rush to the exits had gathered such speed that fresh intervention by the Fed was inevitable. The detail of its action is highly significant. Cash will be offered to brokers and dealers, not just mainstream banks as before. The implication is that the big banks had been hoarding capital and failing to distribute it through the financial system, notably to hedge funds. Put another way, previous interventions had failed to unblock the financial tubes; money wasn't flowing to where it was most needed.

Will this intervention be any more successful? The Fed deserves credit for devising a tailor-made package, recognising the pressures on smaller financial players. But a pattern has developed with these interventions: confidence is boosted for a few weeks, but then disappears with every piece of grim news from the US housing and jobs markets.

In the end, the state of the real economy in the US will dictate where the story goes. The Fed is still only accepting higher-quality collateral for its loans, and a day of reckoning for those holding lower-quality securities still beckons. In other words, the Fed is perfectly reasonably attempting to put out secondary fires, but the main story is still the state of the US mortgage market. The worrying part is how much capital has been required so suddenly - yesterday's $200bn intervention made $400bn in less than a week. It may suggest that the Fed shares the worry that the plot could suddenly get out of control.

Air pockets

The 7% rebound in Ferrovial's share price yesterday told the story: the Spanish owner of BAA, the south-east airports monopoly, has wrung a substantially better deal from the Civil Aviation Authority. Landing charges will rise faster than proposed last November. Assuming BAA raises charges to the maximum (it will), the extra dosh amounts to £400m over the next five years. That's a handsome sum and probably sufficient to allow Ferrovial to complete its tortuous refinancing of BAA.

The official explanation for the higher landing charges is that extra security, a reduction in queues and better infrastructure come at a cost. Of course they do, but has the arithmetic changed so much in the space of a few months?

The suspicion, voiced by the airlines, is that CAA has been alarmed by the 40% fall in Ferrovial's share price over the past year and gone soft. This would be deeply troubling if it is true. It would be akin to saying that passengers must be charged more because BAA is now owned by a debt-laden parent that overpaid for the business and needs a helping hand.

The CAA - naturally - will deny this charge until it is blue in the face, but the suspicion will linger. The position is deeply unsatisfactory and, for as long as Ferrovial owns BAA, the debate will rage.

On the positive side, the CAA stuck to its guns by capping BAA's return on capital at 6.2%. Frankly, though, any movement would have prompted outrage. The 7.75% return allowed in the last regulatory period was too generous; a swing in the pendulum was overdue, as Ferrovial knew when it bid for BAA.

In the end, passengers' attitudes towards BAA will be formed by the standard of service they receive. Terminal 5 at Heathrow should make a big difference. Beyond that, though, we have only Ferrovial's pledges to improve performance and a regulatory regime that looks puny, even after a toughening of potential penalties. Again, deeply unsatisfactory.